Zen mind investing, and the importance of calmness and perspective

Confront unexpected events with equanimity; opportunities will cycle back eventually

Create habits and foster environments that lend themselves to calmness and perspective

Maintaining a zen mind and enabling surroundings, frees your rational mind of the shackles of panic

BOOM!

A profit warning, a collapsing Ponzi scheme, extreme weather, fraud, a takeover (if you’re short). Suddenly you find your portfolio riddled with loss. Why not a margin call as well, to get the heart pumping and your head spinning?

When reality rears its ugly head of randomness and unpredictability it’s all too easy to let panic take over.

Even without actual losses, a soaring stock price in a popular company can create a panic of missing out.

The questions attack you: Should I cover? Should I stop my losses? What if I do? What if I don’t? What’s the best course of action? Could I be embarrassed? What would I do if nobody saw or second-guessed my actions? Getting out now would hurt financially, but if it turns back up afterward might hurt even more psychologically. Can I afford to lose more? What measure would be contrarian? What would be going with the herd? Which would be best in this case? Is the train about to leave the station and I will never get the same chance again?

It’s easy to feel like there are only bad solutions and outcomes.

As the panic feeds on itself, making it increasingly difficult to think rationally, self-doubt creeps in. In that situation you are extremely vulnerable as an investor. You can’t think. You don’t trust yourself. Like Schrödinger’s cat you’re simultaneously prone to taking drastic action and to sticking your head in the sand (denial). Often you are susceptible to external influence – ready to act on the vaguest of rumors or dubious of recommendations.

You are being irrational. Stop that.

First and foremost, if you have adhered to my advice on resilience and endurance there is no need for panic. It’s just an irrational reaction to a sudden loss without any reason for major concern. Even if it feels that way.

Second, even if you’re actually in real trouble, panicking won’t help

Calm down

The first thing you need to do is calm down. Stop flitting from one chart to the other. Consult your best practices or your strategy document. Don’t make any rash decisions when highly emotional and controlled by your amygdala. The fight or flight reaction to high stress on the financial markets is an evolutionary mismatch which needs to be mitigated.

Human psychology, economics and financial markets move in cycles

Internalize that concept for use during times of turbulence

Meditate and control your emotions,

to be ready for coming challenges

It’s never as bad or as final as you think

Keep calm and you will eventually find a solution

In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.

Zen means putting things in their right perspective.

Zen means not overreacting.

Zen means controlling your emotions.

Zen means understanding the cyclicality of nature, of humans and ultimately of financial markets.

No, missing out on a soaring stock doesn’t mean you’ll never find such an opportunity again.

No, you’re not part of the last generation to ever get to make money investing in stocks (or real estate) ever again.

Zen means keeping calm, having practiced methods for keeping unnecessary emotions at bay. Zen means fostering habits of exercising, walking, meditating and meta cognition. Zen means knowing yourself well enough to refrain from making decisions in an agitated state of mind, as well as keeping a set of tools for allowing your rational self to take over when needed.

Reminding yourself that you know enough, that you possess the required knowledge, helps regaining your mental balance. Knowing that you have a functional strategy is another valuable trick. Remember that opportunities will cycle back, and that a loss is but a step along the way to mastery, as long as you avoid complete disasters. There will always be new opportunities, and you will always be able to bounce back as long as you don’t wipe out completely.

control your emotions

lest they control you

Zen is not about weird mantras or silly riddles. Zen is about nurturing a set of habits and an environment intended to help you keep the right perspective in turbulent times, thus allowing your knowledge, skills, strategy and rational mind make the most out of any given situation.

Zen means having a growth mindset, embracing losses as lessons, and taking both sudden plunges and surges with the same equanimity and willingness to learn. The opposite is branding downturns as permanent failures, and panicking over lost opportunities.

Increasing the risk level is not the way. Reducing the mental effort is not the way. Lashing out is not the way. Don’t panic. Fall back to the level of your training. Break down any issue into its components and deal with one problem at a time, calmly, rationally – with equanimity, with a zen mind.

Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it’s free, and it includes my book about hedge fund investing), if you want to make sure you don’t miss out on freebies, offers and subscriber-only discounts on special products.